BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 579|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 445-6614 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: SB 579
Author: Dunn (D)
Amended: 5/3/99
Vote: 21
SENATE FINANCE, INV. & INT. TR. COMMITTEE : 8-0, 5/12/99
AYES: Brulte, Costa, Johannessen, Johnson, Karnette,
Murray, Solis, Leslie
NOT VOTING: Polanco
SUBJECT : Finance lenders
SOURCE : Department of Corporations
DIGEST : This bill clarifies the term "bona fide
principal amount".
ANALYSIS : Existing law directs the Department of
Corporations to administer and enforce the California
Finance Lenders Law which provides for the licensing and
regulation of those engaged in the business of making
consumer or commercial loans.
This bill clarifies the term "bona fide principal amount"
of a loan and specifically excludes certain charges from
the definition.
Comments
What constitutes "charges" :
CONTINUED
SB 579
Page
2
Financial Code Section 22200 specifies that "charges"
include "the aggregate interest, fees, bonuses,
commissions, brokerage, discounts, expenses, and other
forms of costs charges, contracted for, or received by a
licensee or any other person in connection with the
investigating, arranging, negotiating, procuring,
guaranteeing, making, servicing, collecting, and enforcing
of a loan or forebearance of money, credit, goods, or
things in action, or any other service rendered."
Purpose of the bill :
According to the Department of Corporations, the sponsor of
the bill, "SB 579 seeks to clarify and make specific the
term 'bona fide principal amount' of a loan to provide a
uniform approach for determining whether small loans must
comply with existing public protections."
Existing borrower protections for consumer loans :
The California Finance Lenders Law (CFLL) sets forth
regulations to protect borrowers of small loans from unfair
lending practices of licensed lenders and brokers. These
protections vary depending on the amount of the loan.
For consumer loans under $2,500 lenders must adhere to
regulations that limit the maximum amount of loan charges.
(Financial Code Sections 22303, 22304 and 22305) Note:
the maximum rate of charges range from 12-30% per year
depending on the unpaid balance. The limit on the amount
of administrative fees is $50.
Lenders that make consumer loans under $5,000 are subject
to regulations prohibiting compounded charges (Section
22309), limiting the amount of delinquency fees (Section
22320.5), requiring a schedule of charges (Section 22325),
prohibiting loan splitting (Section 22327), prohibiting
real property collateral (Section 22330), and limiting the
maximum loan term (Section 22334).
For consumer loans below $10,000 lenders must meet
regulations that limit other business activity (Section
22154), require equal periodic installments (Section
22307), and require standards for the sale of insurance
SB 579
Page
3
(Sections 22313, 22314).
Problem with current law :
Current law does not define "bona fide principal amount."
The Department of Corporations reports that this
uncertainty in the law has created administrative and
enforcement problems for it and its licensees. Some
unscrupulous lenders have taken advantage of this loophole
in the law by adding multiple charges and other fees to
increase the size of a loan and thereby avoid the small
loan regulations. Without a definition of "bona fide
principal amount" of a loan, these lenders argue that
charges and other fees are part of the loan principal.
The department cites two examples resulting from this
deficiency in the law. In the first case, a lender was
soliciting beneficiaries of wills and making them so-called
"probate loans" which it secured with proceeds from the
estate. One borrower paid almost $2,000 in charges and
other fees to obtain a loan of $3,600. By financing these
charges, the loan amount was increased and the borrower did
not receive the proper small loan protections. As a
result, he was required to pay nearly $12,000 over 10 years
at an annual percentage rate of 25%. The borrower was also
required to provide the home as collateral for the loan,
and to appoint the lender as the power of attorney.
The second case cited by the department involved a lender
making used car loans in which it would add such charges as
administrative fees and costs of insurance to the principal
amount of the loans. By doing so, the lender increased the
amount of these small loans ($1,700) into larger loans
($2,500) thereby avoiding the statutory limitation on rates
and charges. As a result, the annual percentage rate for
many loans exceeded 140%.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/17/99)
Department of Corporations (source)
SB 579
Page
4
Consumers Union
ARGUMENTS IN SUPPORT : The Department of Corporations and
the Consumers Union argue that this bill would benefit the
public by providing borrowers of small loans with
additional protection from unfair lending practices.
The department further states that lenders would benefit
from this bill as it clarifies their responsibility under
existing law, which will help them avoid legal actions.
Finally, the department claims that this bill would help it
administer its existing lending program by eliminating
uncertainty in the law.
NC:sl 5/17/99 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****